Volatility Bounces Bottom Awaiting Bad News or Selling to Strike!

Over the past 5 months we have seen volatility steadily decline as stocks
and commodities rise in value. The 65% drop in the volatility index is now
trading at a level which has triggered many selloffs in the stock market over
the years as investors become more and more comfortable and greedy with rising
stock prices.

Looking at the market from a HERD mentality and seeing everyone run to buy
more stocks for their portfolio has me on edge. We could see a strong wave
of fear/selling hit the S&P 500 Index over the next two weeks catching
the masses with their hand in the cookie jar . . . again.

If you don't know what the volatility index (VIX) is, then think of it as
the fear index. It tells us how fearful/uncertain investors are or how complacent
they are with rising stock prices. Additionally a rising VIX also demonstrates
how certain the herd is that higher prices should continue.

The chart below shows this fear index on top with the SP500 index below and
the correlation between the two underlying assets. Just remember the phrase "When
the VIX is low it's time to GO, When the VIX is high it's time to BUY."

Additionally the Volatility Index prices in fear for the next 30 days so do
not be looking at this for big picture analysis. Fear happens very quickly
and turns on a dime so it should only be used for short term trading, generally
3-15 days.

Volatility Index and SP500 Correlation & Forecast Daily Chart:

Global Issues Continue To Grow But What Will Spark Global Fear?

Everyone has to admit the stock market has been on fire since the October
lows of last year with the S&P 500 Index trading up over 26%. It has been
a great run, but is it about to end? Where should investors focus on putting
their money? Dividend stocks, bonds, gold, or just sit in cash for the time
being??

I may be able to help you figure that out.

Below is a chart of the Volatility index and the gold exchange traded fund
which tracks the price of gold bullion. Notice how when fear is just starting
to ramp up gold tends to be a neutral or a little weak but not long after
investors start selling their shares of securities we see money flow into
the shiny yellow safe haven.

Gold & Fear Go Hand-In-Hand: Daily Chart

Looking at the relationship between investor fear/uncertainty and gold you
will notice scared money has a tendency to move out of stocks and into safe
havens.

Trading Conclusion Looking Forward 3 months...

In short, I feel the financial markets overall (stocks, commodities, and currencies)
are going to start seeing a rise in volatility meaning larger daily swings
which inherently increased overall downside risk to portfolios and all open
positions.

To give you a really basic example of how risk increases, look at the daily
potential risk the SP500 can have during different VIX price levels:

Volatility index under 20.00 Low Risk: Expect up
to 1% price gaps at 9:30am ET, and up to 5% corrections from a previous high.

Volatility index between 20 - 30 Medium Risk: Expect
up to 2% price gaps at 9:30am ET, and up to 15% corrections from recent market
tops or bottoms.

Volatility index over 30 High Risk: Expect 3+%
price gaps at 9:30am ET, and possibly another 5-15% correction from the previous
VIX reading at Medium Risk

Note on price gaps: If you don't know what I am talking about a price gap
is simply the difference between the previous day's close at 4:00pm ET
and the opening price at 9:30am ET.

To continue on my market outlook, I feel the stock market will trade sideways
or possibly grind higher for the next 1-2 weeks, during this time volatility
should trade flat or slightly higher because it is already trading at a historically
low level. It is just a matter of time before some bad news hits the market
or sellers start to apply pressure and either of these will send the fear
index higher.

I hope you found this info useful and if you would like to get
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Chris Vermeulen, founder of AlgoTrades Systems., is an internationally recognized
market technical analyst and trader. Involved in the markets since 1997.

Chris' mission is to help his clients boost their investment performance while
reducing market exposure and portfolio volatility.

Chris is also the founder of TheGoldAndOilGuy.com, a financial education and
investment newsletter service. Chris is responsible for market research and
trade alerts for of its newsletter publication.

Through years of research, trading and helping thousands of individual investors
around the world. He designed an automated algorithmic trading system for the
S&P 500 index which solves his client's biggest problem related to investing
in the stock market: the ability to profit in both a rising and falling market.

AlgoTrades' automated trading systems allows
individuals to investing using either exchange traded funds or the ES mini
futures contracts. It is supported by many leading brokerage firms including:

He is the author of the popular book "Technical
Trading Mastery - 7 Steps To Win With Logic." He has also been featured
on the cover of AmalgaTrader Magazine, Futures Magazine, Gold-Eagle, Safe
Haven,The Street, Kitco, Financial Sense, Dick Davis Investment Digest and
dozens of other financial websites. His list of personal and professional
relationships approaches 25,000, people with whom he connects and shares
is market insight with out of his passion for trading.

Chris is a graduate of Seneca College where he specialized in business operations
management.

Chris enjoys boating, kiteboarding, mountain biking, fishing and has his ultralight
pilots license. He resides in the Toronto area with his wife Kristen and two
children.